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Digital advertisements are gaining widespread popularity owing to their low cost compared to television advertisements. Additionally, advertisers can reach out to their target audience, which further accelerates demand for this mode of campaigning.

Notably, in first-quarter 2018, Facebook’s Advertising revenues soared 50.1% year over year to $11.795 billion, contributing around 98.55% of the total revenues. For Twitter, Advertising revenues increased 21% year over year to $575 million, which accounted for around 86.4% of the total first-quarter revenues.

However, with such a huge percentage of revenue mix being generated from advertisements, these companies are also at a threat in case any mishap occurs. For example, the most recent data breach fiasco put Facebook in a spot.

Cambridge Analytica, an analytics firm that used data to influence audience behavior had allegedly influenced the 2016 U.S. presidential election, by affecting around 87 million Facebook users.

Facebook faced widespread criticism including from noteworthy companies like Apple (AAPL - Free Report) and Tesla among others, post the revelation of the news. The company also received warnings from the Indonesian government regarding the same. Owing to these developments, the company’s shares took a beating with Facebook losing around 8.5% between Mar 19 and Apr 9.

Facebook’s Measures

Impressively, instead of just being apologetic and testifying at congressional hearing sessions and before European lawmakers, Facebook’s CEO, Mark Zuckerberg is taking up steps to combat the biased impact that political advertisements have on election results.

The company removed accounts and pages that were allegedly involved in influencing the election results. Facebook also backed the Honest Ads Act and stated that only authorized advertisers will be able to post political ads going forward.

Facebook also collaborated with Atlantic Council and the Digital Forensic Research Lab owned by the latter for better monitoring of dis-informative campaigns on the platform.

Most recently, its director of ad product management, Rob Leathern stated that beginning May 24, all ads related to elections and other political issues on either Facebook or its photo sharing application Instagram will have to be labeled with the name of the payer in the disclaimer section.

The respective label will redirect the user to a “searchable archive” that will provide information on the budget of the campaign, number of viewers as well as the demographic details of the audience. The archive includes advertisements that started running in May and will store information for seven years. People buying political advertisements will have to mention their identity and location.

Management stated that they have increased spending on enhancing the transparency of the political ads with employees dedicated to keeping a close watch. The company is also incorporating artificial intelligence to fight the issue.

We believe that Facebook’s initiatives to work on the security loopholes are assisting the company in boosting its trustworthiness and re-establishing the defamed image of this Zacks Rank #3 (Hold) stock. All these will eventually be beneficial for the company’s financials.

Apart from Facebook, Twitter is also working on revamping its initiatives related to political advertisements.

How is Twitter Bracing Up?

Twitter, which was also criticized for running political advertisements on its platform, announced a host of stricter regulations.

The company stated that advertisers will have to provide evidence that they stay in the United States. Additionally, federal election campaign identification will have to be provided by candidates and committees.

The accounts that will be used for such campaigns “must have a profile photo, header photo and website that matches the entity's online presence, and the Twitter bio has to include a website with valid contact information.”

The company will add election labels for candidates participating in the forthcoming mid-term elections in November. It will also add “badge and disclaimer” for political content coming from certified accounts. Twitter is also planning to come up with an Ad Transparency Center that will be similar to Facebook’s “searchable archive” and have same sort of information as mentioned above.

Notably, the company has also backed the Honest Ads Act that is evident of its efforts to enhance transparency in political advertisement.

We believe that these efforts will eventually boost user engagement, which, in turn, will be a tailwind for this Zacks Rank #1 (Strong Buy) stock.

The initiatives taken up by Facebook and Twitter ahead of the mid-term U.S. elections are encouraging. These announcements have already received accolades from Democratic Senator, Mark Warner.

We believe that revamping political advertisements will eventually ensure the ongoing stream of advertising revenues. It will aid both social media platforms as well as the interests of the advertisers in the long run.

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